Some towns in Wisconsin and Minnesota worry as frac sand industry pauses

WINONA, minn. – A line of semitrailer trucks rolled onto a scale next to a one-story green shed at Winona's commercial port on a recent afternoon, a weighty procession of raw materials mostly headed for Mississippi ports. Last year, so many of the trucks were filled with northern white frac sand excavated from the region that they filled more than 250 barges shipped downriver to Texas oil fields.

And this year?

"Not one pound" of frac sand, said Dan Nisbit, owner of the corporation that leases the docks from the city of Winona.

Frac sand shipments have plummeted thanks to a glut of oil and low prices. The price for a barrel of oil fell from $85 a year ago to just under $46 today.

The drop-off idled some sand mines in southwestern Wisconsin and southern Minnesota, where much of the nation's highest-quality frac sand comes from.

Towns that allowed the mining, often through protests over environmental and health concerns, are now uncertain about their future.

Some publicly traded companies have watched their market values continue to slide, though some industry analysts expect the current downturn is just part of the boom-and-bust cycle of the energy industry.

But it's also translated into less revenue for places like Winona, where port development coordinator Myron White said the drop in frac sand shipments will translate into roughly $100,000 less in the city's coffers this year.

"The writing was on the wall so we had budgeted for a downturn in … fees," White said.

Silica sales

The nearly pure crystal composition of the sand in the Upper Midwest makes it ideal for hydraulic fracturing, a process in which sand is mixed with water and chemicals and pumped into an oil well to fracture the rockbed and then prop open those cracks so that oil and gas can be drawn out.

Some of the sand gets used for other purposes, such as glass production, but the oil and gas industry buys 72 percent of industrial sand, according to a 2015 report from the Chicago-based Heartland Institute, a free-market think tank.

Driven by the boom in domestic oil production, frac sand operations more than doubled over the past decade to 75 million metric tons in 2014, according to the group. On the Minnesota side of the river, nine companies mine frac sand along the Mississippi and Minnesota river basins, according to the state Department of Natural Resources.

In Wisconsin, state officials count some 85 companies statewide actively mining, processing or hauling sand, and 40 inactive companies. Despite slack demand, several companies have sought permits for new or expanded sand operations in Wisconsin, said Roberta Walls, the industrial sand specialist for the Wisconsin Department of Natural Resources.

Walls doesn't track how many of the facilities have been idled or cut back on employment though.

"They're all kind of waiting, anticipating a market turnaround," she said.

The drop in business hasn't led to a significant loss in town revenue in most places yet, said University of Wisconsin extension economist Patricia Malone. That's because most plants didn't have a significant footprint in the local economy to begin with.

"Some of the mines would try to buy locally to the extent that they could, but it tended to be small stuff," she said. Now that some of the sand mines have been idled, it's not like a large factory shutting down, she added.

"We told people that this is an industry like virtually every other extractive industry that cycles through boom and bust, boom and bust," she said. The larger companies know the economic model and even plan for it, Malone said. "That's part of the deal."

Wisconsin Industrial Sand Association spokesman Rich Budinger said he hopes to see the market stabilize in six months to a year. "This isn't the first time we've seen this sort of thing," he said.

A golden agreement

If the companies are accustomed to waiting out the doldrums, it's a bit different for some of the cities that agreed to sell them land. In the heart of Wisconsin's Trempealeau County, the state's top mining area, a new frac sand processing facility rising on the edge of Blair, Wis., is the fourth in the state for Hi-Crush Partners, a Houston-based industrial sand firm created in 2010.

Using an annexation process that brought the processing facility into the town's boundaries, Hi-Crush was able to work directly with the city's mayor and City Council rather than comply with the county government's ordinances. Such annexation agreements are common in Wisconsin's frac sand industry.

In exchange for the agreement to annex Hi-Crush's site, the city of Blair was to get $1.5 million from the company up front and $300,000 annually starting in five years. The local school district would get a $500,000 grant under the deal.

Shortly after the deal was inked, the boom times for Wisconsin frac sand ended. Hi-Crush's market value cratered this year as the frac sand business slowed. It ended the week trading at $7.56 a share, far below its 52-week high of $55.71. Calls to Hi-Crush were not immediately returned.

Despite the downturn in the industry, Hi-Crush delivered the cash this summer, City Council member Tim Robertson said.

The funds are sorely needed for Blair, he added. Some $182,500 of the money was used to pay the city's share of a new firetruck. The truck is expected in about three weeks, he said.

The rest of the $1.5 million payment has been set aside so that city officials can determine how best to spend it. The list of needs includes repairing the municipal pool, fixing "a lake full of muck," the aging fire department and the service needs of a new subdivision, Robertson said.

Now that Hi-Crush is in town, Robertson wants them to succeed, but he was on the minority of the board that opposed the initial agreement with Blair.

"I didn't feel like it was in the long-term interest of the community," he said. "What happens if they have to pull up and leave?"

At the edge of Blair, the two-year-old Blair-Taylor United K-12 campus was humming with activity on a midweek afternoon. Students sat in the airy and modern-looking cafeteria during lunch break. Floor-to-ceiling windows in the school's office overlooked the freshly striped football field.

The school had some financial concerns as recently as a year ago, said Superintendent Jeff Eide, but now he's considering a new HVAC system thanks to the $500,000 grant the district received from Hi-Crush.

The Hi-Crush grant was a significant boost to the district's $7 million annual budget. Hi-Crush also pledged to contribute $25,000 a year for operational expenses, Eide said.

Now that the sand business has stalled, he said he's been in touch with a Hi-Crush vice president who assured him that business would continue. That hasn't stopped Eide from taking notice of activity at the Hi-Crush construction site.

"It seems like they're going forward because I keep seeing buildings going up, so something's going on," Eide said.

Matt McKinney • 612-673-7329